PL M20 FAR IFRS Student mark plan Final PDF

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Professional Level – Financial Accounting and Reporting - March 2020

MARK PLAN AND EXAMINER’S COMMENTARY The marking plan set out below was that used to mark this question. Markers were encouraged to use discretion and to award partial marks where a point was either not explained fully or made by implication. More marks were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid points which were made by candidates.

Question 1 General comments Part 1.1 of this question tested the preparation of a statement of profit or loss and a statement of financial position. Adjustments included deferred revenue, inventory calculation, an impairment and a right of use asset with lease liability. Part 1.2 of the requirement asked for examples from the question of the IASB’s Conceptual Framework’s elements and how they each meet the definition. Bilberry Ltd – Statement of financial position as at 30 September 2019 £ ASSETS Non-current assets Property, plant and equipment (159,250 + 392,490 + 230,000) (W5) Right-of-use asset (W5) Current assets Inventories (W 1) Trade and other receivables Cash and cash equivalents

123,380 920,120

480,000 120,000 186,340 786,340

Non-current liabilities Lease liabilities (W6) Current liabilities Trade and other payables Deferred income (W2) Lease liabilities (15,420 – 12,685) (W6) Taxation Total equity and liabilities

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781,740 15,000 796,740

59,980 59,700 3,700

Total assets Equity Ordinary share capital Share premium account Retained earnings (40,240 + 146,100) Equity

£

12,685

78,300 3,060 2,735 37,000 121,095 920,120

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Professional Level – Financial Accounting and Reporting - March 2020

Bilberry Ltd – Statement of profit or loss for the year ended 30 September 2019 £ 1,261,720 (633,990) 627,730 (249,860) (193,690) 184,180 (1,080) 183,100 (37,000) 146,100

Revenue (1,264,780 – 3,060) (W2)) Cost of sales (W1) Gross profit Administrative expenses (W1) Operating costs (W1) Operating profit Finance costs (W6) Profit before tax Income tax Profit for the year Workings W1 Expenses

Nominal ledger b/fwd Opening inventories Closing inventories (40,900 + 19,080 (W 3)) Depreciation charges (24,500 + 17,850 + 3,000) (W5) Impairment (W4) Reverse lease payment (W6)

Cost of sales £ 567,300 61,320 (59,980)

Admin expenses £ 249,860

Operating costs £ 197,350

45,350 20,000 633,990

(3,660) 193,690

249,860

W2 Revenue

Sale of goods Normal cost of after sales support Discount (5,400 / 36,000) Deferred revenue (4,590 x 8/12)

£ 30,600 5,400 36,000 15%

Discount applied of 15% £ 26,010 4,590

3,060

W3 Closing inventory Per count at 30 September 2019 Less: delivery 1 October 2019 Add: sales (2,500 / 1.25)

£ 11,800 (1,600) 2,000

£

12,200 Variable cost per unit ((16,020 + 4,700) / 2,800) Fixed cost per unit (3,600 / 3,000)

800 x £8.60 Inventory at 30 September 2019

£ 7.40 1.20 8.60 6,880 19,080

W4 Impairment Land & building – cost

Land £ 150,000

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Professional Level – Financial Accounting and Reporting - March 2020

Recoverable amount Impairment

130,000 20,000

W5 Property, plant & equipment Plant & equipment £ Buildings Cost b/fwd Less: accumulated depreciation

245,000 (61,250) 183,750

Buildings £ 714,000 (303,660) 410,340

Impairment (W4)

Land £ 250,000

(20,000)

Depreciation for year (714,000 / 40yrs) 245,000 / 10yrs

(17,850) (24,500) 159,250

Leased machine Cost Depreciation (18,000 / 6yrs)

392,490

230,000

18,000 (3,000) 15,000

W6 Lease 1 October 2018 £ 18,000 15,420

Interest (6%) £ 1,080 925

Payment £ (3,660) (3,660)

30 September 2019 £ 15,420 12,685

Presentation of the statement of profit or loss and the statement of financial position was generally good, and certainly better than in some recent sessions. A very small number of candidates are still not following the instructions to make sure all text is visible and some narrative in columns was partially cut off. These candidates lost marks as text could not be read in its entirety. There were some very high marks on this question. Almost all candidates dealt correctly with the tax charge and liability, the trial balance figures for costs, property, plant and equipment, opening inventories, current assets and liabilities and the equity figures. A good majority of candidates showed a working for their closing retained earnings figure, which is not always the case. Clear workings were usually given in the form of a costs matrix and workings for property, plant and equipment. However, the audit trail was not always clear from the latter to the figure on the statement of financial position. As is often the case, directional errors were sometimes made in the costs matrix, most commonly with the depreciation charges for the year. These usually occur when candidates start with a negative balance. Many candidates arrived at the correct figure for closing inventories and workings were usually clear. However, a number of candidates included a different figure in their costs matrix to the one shown in their working, or omitted to include the unadjusted figure for closing inventories. The most common errors in the calculations for the adjustment were: 



for the inventories in the holding area, not dividing the correct costs by the correct production figures (planned or actual) and/or multiplying the resultant cost per unit by actual production instead of by the number of units left in inventory at the year end; and for the warehouse not counted at the year-end, backing out the cost of the post year-end delivery, but not adding in the cost of the goods despatched, and/or failing to add in the unadjusted figure.

Many candidates arrived at the correct figure for property, plant and equipment, although they did not always show the right-of-use asset separately on the face of the statement of financial position. Where errors were made the most common were:

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Professional Level – Financial Accounting and Reporting - March 2020     

Depreciating the right-of -use asset over ten instead of six years. Omitting the depreciation on the right-of -use asset from costs. Calculating depreciation for plant and equipment on a reducing balance basis instead of on a straightline basis. Calculating the impairment as cost less recoverable amount (instead of using the higher value in use), with costs to sell sometimes adjusted for in the wrong direction. Including the impairment as an adjustment in retained earnings.

The lease table was often completely correct although some candidates wasted time calculating the present value of minimum lease payments when it was stated in the question that this equated to the cash price, or extended the table beyond the necessary two years. A minority treated the payments as in advance instead of arrears and others failed to split the year-end liability or split it incorrectly. Most candidates took their correct own figure for interest to the statement of profit or loss but a few showed the annual lease payment here. The adjustment for deferred revenue probably caused the most issues, although a good number of candidates did arrive at the correct figure, and correctly adjusted revenue and showed the figure in current liabilities. Others arrived at a figure and adjusted revenue but failed to show it also in current liabilities or quite frequently adjusted trade receivables instead. The most common incorrect figures were £5,400 (the whole of the after-sales support package) or £3,600 (eight-twelfths of that figure). A number of candidates failed to show an audit trail for their revenue figure. Total possible marks Maximum full marks

23 22

(1.2) Elements of the financial statements Asset – Bilberry Ltd’s head office building is recognised as an asset. The building is a resource controlled by Bilberry Ltd as a result of a past event, which was the acquisition of the building. Bilberry Ltd’s expects the business to generate future economic benefits and hence the head office function (and therefore the building itself) will contribute to the smooth running of the business. Liability – The lease is recognised as a liability. There needs to be a present obligation which is Bilberry Ltd’s obligation to pay annual lease payments over a contracted six years as a result of a past event which was the entering into the lease contract. The contracted annual lease payments are the future outflow of resources. Income – Revenue from sales is a form of income as it brings cash inflows or enhancement of assets in the form of trade receivables. Expenses – Depreciation is an expense as it reduces the carrying amount of property, plant and equipment (ie, depletes an asset). Equity – Equity is Bilberry Ltd's ordinary share capital and retained earnings. The sum of these are equal to total assets minus total liabilities/is the residual interest in the assets of the entity after deducting all its liabilities.

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Professional Level – Financial Accounting and Reporting - March 2020

There were some excellent answers to this part, with many candidates scoring maximum marks. Almost all candidates correctly defined assets and liabilities, although fewer gave an appropriate definition for the other three elements. Almost all candidates gave a suitable example for all five elements, although explanations as to how the example met the definition was much better, again, for assets and liabilities. Total possible marks Maximum full marks

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9 5

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Professional Level – Financial Accounting and Reporting - March 2020

Question 2 General comments Part 2.1 of this question required candidates to explain the financial reporting treatment of three accounting matters, given in the scenario. The matters covered a convertible bond, a government grant and a provision. Part 2.2 required a revised profit calculation along with an EPS calculation following a rights issue. Part 2.3 asked for an explanation of the impact on the financial statements of presenting expenses by nature rather than function. Part 2.4 asked for the UK GAAP differences in relation to government grants. (2.1) (1) Convertible bond The convertible bonds are compound financial instruments per IAS 32 Financial Instruments: Presentation. They have both an equity and a liability component which should be presented separately at the time of issue. IAS 32 requires that the substance of such an instrument should be reflected, focusing on the economic reality that in effect two financial instruments have been issued, rather than the one instrument. The liability component should be measured first at the present value of the capital and interest payments. The discount rate used should be the effective rate for an instrument with the same terms and conditions except without the ability to convert it into shares, here the market rate of interest for similar bonds without the conversion option is 8%.

1 October 2019 1 October 2020 1 October 2021 Liability component Equity component (bal fig) Total

Cash flow £ 24,000 24,000 424,000

Discount factor @ 8% 1/1.08 1/1.082 1/1.083

Present value £ 22,222 20,576 336,585 379,383 20,617 400,000

The liability should initially be measured at £379,383 and the equity component is the residual amount of £20,617. Once recognised the equity element remains unchanged. However, the liability element should be shown at amortised cost at the end of each year. 1 Oct 2018 £ 379,383

Interest (8%) £ 30,351

Payment (6%) £ (24,000)

30 September 2019 £ 385,734

At the year end an adjustment to reduce non-current liabilities of £14,266 (400,000 – 385,734) should be made and an additional £6,351 (30,351 – 24,000) recognised as finance costs as part of profit or loss. (2) Government grant IAS 20, Accounting for Government Grants and Disclosure of Government Assistance requires grants to be recognised when there is reasonable assurance that:  

The entity will comply with the relevant conditions, here there are no conditions; and The entity will receive the grant, Jonica plc is already in receipt of the grant.

Therefore, Jonica plc complies with both conditions and the grant should be recognised.

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Professional Level – Financial Accounting and Reporting - March 2020 Government grants should be recognised in profit and loss over the periods in which the entity recognises as expenses the costs which the grant are intended to compensate. It is against the accrual principle to recognise the grant in profit or loss on a cash receipts basis as Jonica plc currently has. Jonica plc’s accounting policy is to recognise government grants using the netting-off method. Under this method the grant is deducted from the carrying amount of the related asset. The grant will then be recognised over the life of the related asset, here by way of a reduced depreciation charge. Income should be reduced by £150,000 which should instead be credited to non-current assets giving a revised figure of £175,000. As it is assumed that depreciation has already been charged for the year on the full asset cost of £325,000 an adjustment will need to be made for this. £24,375 was recognised by the financial controller, although only £13,125 should have been recognised, being depreciation on £175,000 rather than £325,000. £11,250 (24,375 – 13,125) should be credited to profit for the period and debited to non-current assets to adjust for this. At 30 September 2019 the carrying amount of the asset should have been £161,875 (175,000 – 13,125) reducing non-current assets by £138,750 ((325,000 – 24,375) – 161,875). (£325,000/10 years) x 9/12 = £24,375 (£175,000/10 years) x 9/12 = £13,125 (3) Provision – legal claim Per IAS 37 Provisions, Contingent Liabilities and Contingent Assets , a provision should be recognised where:   

there is a present obligation, which may be a legal or constructive one, as a result of a past event (the claim arising from the sale of faulty goods); it is probable that an outflow of resources will be required to settle the obligation (payment of the claim); and the amount can be estimated reliably (being the estimate made by the lawyers).

Therefore, a provision should be recognised at 30 September 2019. This is a single obligation so the provision should be based on the most likely outcome. Therefore, recognise a provision for £21,000 . Since the lawyers have recommended that the claim is settled out of court as soon as possible the provision has not been discounted. Therefore, a provision of £21,000 should be recognised as part of current liabilities and debited to profit or loss for the period. This explain question covered three issues – convertible debt, a government grant to be accounted for using the netting off method and a provision for the supply of faulty goods . Generally, answers to this part of the question were good with nearly every candidate addressing all three issues and including both narrative explanations and revised figures in their answers. Convertible debt - The majority of candidates correctly identified the financial instrument as a compound financial instrument and stated that it needed to separated out between its debt and equity elements. It was common to see the numbers correctly calculated and split between equity and debt. Most candidates also realised that the finance charge in the statement of profit or loss should be based on the interest rate of 8%. Generally, candidates also went on to use amortised cost, although calculations were not always correct. A common mistake was to split the liability between current and non-current. Only a significant minority of candidates realised that the adjustment needed to the finance cost was the difference between the figure calculated using the 8% and the actual amount paid. Only a minority of candidates also stated that the equity figure did not subsequently change. Government grant – Answers to this issue were a little more mixed with a significant number of candidates wasting time discussing the deferred income approach when the question clearly stated that the company’s policy was to use the netting off method. However, most candidates did realise that the entry to income needed to be reversed out and instead netted off against the cost of the asset. A majority of candidates attempted to calculate a revised depreciation figure although many forgot to time apportion it. A minority of candidates calculated numbers using the deferred income approach. Provision – The majority of candidates applied the IAS 37 criteria to the scenario and correctly concluded that a provision was necessary. A majority of candidates stated that as a single obligation the most likely outcome gave the amount to be recognised although a minority incorrectly used an expected value

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Professional Level – Financial Accounting and Reporting - March 2020 approach or calculated both figures. Almost all candidates referred to the impact on profit and a reasonable number stated it should be recognised as a current liability. Only a minority of candidates linked this to the fact that discounting was not necessary. Total possible marks Maximum full marks

32½ 18

(2.2)

Brought forward (1) Convertible bond (2) Government grant

Profit for the period £ 1,035,000 (6,351) (150,000) 11,250 (21,000) 868,899

– finance costs – income – depreciation

(3) Provision Revised Dates 1 Oct 2018 – 31 Jan 2019 Rights issue 1 for 3 1 Feb – 30 Sept 2019

No. of shares in issue 600,000

380 / 365

Weighting

Total

4/12

208,219

8/12

533,333 741,552

200,000 800,000

Working Bonus adjustment factor Theoretical ex-rights price: 3 shares @ £3.80 1 share @ £3.20 4 shares

£ 11.40 3.20 14.60

Theoretical ex-rights price per share Bonus fraction 380 / 365 Basic earnings per share

Bonus factor

£14.60 / 4 = £3.65

£886,899 / 741,552 = £1.17

Most candidates attempted to calculate a revised profit figure but the requirement to calculate basic earnings per share proved more challenging. The most common mistake in the adjustment to profits was to simply put the correct accounting adjustment through rather than reversing out what had actually been recognised first. Most candidates made errors in the weighted average share capital table and in particular relatively few managed to arrive at the correct bonus fraction for use in the table. Other common mistakes included:    

Miscounting the number of months before and after the issue of shares. Basing the table on the individual share issues rather than using the cumulative total. Applying the bonus fraction to all periods in the table. Applying the bonus fraction upside down.

Total possible marks Maximum full mark...